Economic Policies on January 1–16, 2011

Prices and inflation

Increasing indices…

According to NBS data in December 2010 comparative to November the consumption price index (CPI) was up by 1.3%. Yet, compared with December 2009 it grew by over 8%. Thus, the inflation rate for 2010 was 8.1%. The increase of average consumption prices in December 2010 was caused by higher food prices by 2%, non-food prices — by 1.4%, and the tariffs for public services remained almost stable on the level of November. Additionally, during this period the prices on fuel increased — by about 6%, which resulted in a higher inflation. More or less, the main factors that will influence inflation also in 2011 remain pretty much the same: it will depend much on domestic economic activity (if the economy starts to recover, the risks that inflation would increase are smaller), on the exchange rate, on the volume of agricultural crops (especially that the share of food products in the consumption basket or when the CPI is calculated is quite high, about 35%) and on possible transpositions of higher fuel prices, energy agents, etc. , which undoubtedly will influence the whole economic process.

For 2011 inflation should be the target of targets…

In 2011, perhaps more than in previous years, inflation will be the target of targets and other macroeconomic indicators with impact for general public will depend on the behaviour of this indicator. We may say with a probability that the annual inflation rate will not exceed the limits of 5–6% and NBM forecasts, but with big chance, quite big, to get out of forecasts considering the rising prices of imported hydrocarbons (natural gas), electricity etc., increases that will be soon approved and transposed locally by increases of tariffs, taxes etc. In fact, the inflation indicator will remain the indicator with the greatest impact in economy. We must not forget that Moldovan economy is heavily exposed to whatever is happening outside, so the inflation may be imported through higher prices on import goods and products and here the state practically doesn’t have room to manoeuvre. On the other hand, the state, including through the central bank, could intervene on the market and regulate the prices. Thus, the measures taken by authorities to intervene administratively in order to avoid potential increases of market prices for some products could be justified. But here a dilemma as big arises. A market economy can not allow unequivocal intervention of the state, whereas the manufacturers and retailers have the right to determine by themselves the cost of a product, this of course within acceptable limits.

Potential solutions of authorities…

NBM will also probably practice in 2011 a more or less directed foreign currency regime especially to restrain the inflation. But that will depend much on developments in regional and international markets. Eventually the inflation might get close to the proposed target, even if its significance increase is possible especially in the first half of year, and may reach negative values in summer, just as it also happened in previous years. However, nothing is certain yet, and incertitude is too high in order to to come up with some exact predicting figures for this indicator. However, in a period when inflationary factors are largely exogenous, what we have to do is to try to avoid emphasizing the effects of outside shocks. In the medium and long term it is essential to restrain the inflationary expectations; it means that monetary policies should not be accommodative, i.e. to be not changed depending on what happens in the region, and the public budget should not get out of the control and enter in one of its large deficit. It should be also added here a moderate policy of expenditures and incomes, taking into account the pace of productivity. Moldova could have inflation between 6% and 8% for years ahead, and one of the reasons would be also the tendency to align the tariffs for services, utilities, etc. to the levels in European countries.

Foreign trade

Exports grow…

In November 2010 the exports of realised goods amounted to a value of about 205 million USD, by over 14% more than the in previous month and by 48% compared with November 2009.In January-November 2010 exports totalled over U.S. $ 1.395 billion, a volume that’s higher than the result achieved in the corresponding period of 2009 by over 20%. Exports of food and live animals were on first place with a share of about 26% of the total value of exports. In this section of goods the major share belongs to the exports of vegetables and fruits (about 54% of total section and almost 14% of total exports), cereals and cereal preparations (over 27% of the total section and 7% of total exports). The substantial increases in commodity groups were scored by exports of food and live animals — about 29%, inedible raw materials, except fuels — about 62%, machinery and transport equipment — about 23%, beverages and tobacco — about 18%, chemicals and derived products — 31% (especially medicinal and pharmaceutical products — over 42%) etc.

…but imports are no stagnating either

Imports of goods accomplished in November 2010 amounted to over USD 405 million, by 8.5% more than in previous month and over 23% more compared with November 2009.In January-November 2010 imports totalled over U.S. $ 3.415 billion, a volume that’s higher than the same period in 2009 by over 17%.Imports from EU-27 countries amounted to over U.S. $ 1.526 billion (about 20% more than in January-November 2009), with a share of about 45% of total imports. Imports of goods from CIS countries amounted to U.S. $ 1.098 billion (by 8.8% more than in January-November 2009), equivalent to a share of over 32% of total imports (34.6% in January-November 2009).Imports of machinery and transport equipment had a market share of about 21% of total imports. Imports of mineral fuels, lubricants and derived materials had more than 20% of total imports, of which over 40% of the total were due to natural gas. Imports of food and live animals had a share of over 10% of total imports.

However, the trade deficit continues to grow…

Large gap in the evolution of exports and imports contributed to the accumulation in January-November 2010 of a trade deficit amounting to 2.020 billion USD, by 262 million USD (about 15%) more than that in the same period in 2009.With European Union countries (EU-27) the trade balance ended with a deficit of USD 862.4 million (in January-November 2009 — 667.6 million USD), while with the CIS countries — 544.7 million USD (in January-November 2009 — 567.4 million USD).

The evolution of international markets

2011 is threatened by sovereign risks…

According to a report by the World Economic Forum (WEF), the risk that imprudent management of public finances would trigger the entry of some countries in default is one of the biggest economic threat in this year. High levels of state debts accumulated following the measures to combat the financial crisis have reduced to very low levels the countries’ ability to cope with new shocks, shows the report 2011 Global Risks. “Current fiscal policies are unsustainable in most industrialized economies. In the absence of some profound structural adjustments, a high risk of state bankruptcy will be experienced”, said Daniel Hoffman, chief economist of Zurich Financial Services, who has contributed to the report. The analysis identified 37 global risks, and the report precedes the annual meeting organized by WEF in Davos, Switzerland, which will be attended by political leaders, officials from central banks and the most important figures in the business world. “The whole world is perhaps more vulnerable to shocks than at any time of the last half of century. The reaction to the financial crisis has emptied the national treasuries and cut people’s income, and besides, the present and previous fundamental risks have been preserved”, said the WEF Business Executive Director, Robert Greenhill, in a press conference held in London. Large state debts have been also mentioned by WEF as a major threat in the last year risk report, and the crisis in Greece has dominated the Davos meeting in 2010, eclipsing other issues. Meanwhile, the crisis in euro area has also engulfed Ireland, which was also pushed on the pathway of an agreement with the IMF, and now Portugal and probably Spain, the fourth largest European economy, are threatened. Investors fear that the country “on the periphery of the euro area” will not be able honour their financial commitments.

Increasingly restricted resources could destabilize the “world order”…

Another important topic on the agenda of Davos summit ever deeper divergences could appear between unprecedented economic expansion in emerging countries and fatigue experienced by developed economies. Such imbalances increase the risk of industrial protectionism and r of currency wars. All this is on the background of increasingly interconnected economic world, which facilitates the rapid outpouring of local crises over regional or global markets .The situation requires more than ever global coordination and cooperation among governments, WEF warns. More restricted resources of fundamental elements, such as food, water and energy, also represent important threats this year, stressed by lack of investments in infrastructure due to large budgetary deficits. The strong growth of food and energy prices raised warning signs of inflation in many countries and the situation will further deteriorate due to increased incidences of extreme weather phenomena, increased need of resources and widespread financial speculation. Serious problems affecting some countries and increased number of states with collapsed economy feed illicit economic activity worldwide, supporting organized crime and undermining the rule of law. Total value of illegal commercial transactions worldwide is estimated at 7–10% of the global economy, i.e. approximately USD 1300 billion in 2009, according to WEF.

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